Monday, February 14, 2011

In light of Thursday's debate, I thought I'd post this op-ed piece by Paul Krugman. Krugman blames a misinformed electorate, Republicans' rigidity on taxes, and a lack of concern for the future as the cause of a budget proposal he claims will "save remarkably little money but would do a remarkably large amount of harm."

While I am just beginning to understand the issues surrounding the budget and there is much I still do not understand, Krugman's piece strikes me as over-simplified. While he hits at some key issues, it seems to me that solving the national debt is a matter of more than just "reining in health-care costs" (the only solution that Krugman offers).

8 comments:

I found his opinion to be rather interesting and, sadly, pretty accurate. As many of us are learning through our various internships, the American public is not that educated and is easily manipulated by the media and party figures--on both sides of the political spectrum. It's a shame that a large amount of conservatives are poorly labeled by the extreme right because I think that more and more of the educated right out there DOES in fact realize that "higher taxes now" can lead to a more prosperous US future--one of many conservative taboos to proclaim. People will always look out for their own situations, and unfortunately, the loudest groups will be able to shift the power and influence to cater to their needs...right now we're in the midst of a serious power shift, and republicans are doing everything they can to stop it [just as Obama is being smart to not offer entitlement program reforms in his Budget this morning and let the Republicans take the offensive]. And frankly, I don't blame them.

While Krugman cites the Pew poll about Americans wanting to increase spending in most areas, I thought the Program for Public Consultation study on this issue was one of the most interesting reads on the subject. The researchers asked a representative sample of Americans which areas they wanted to cut to solve the deficit, thus actually requiring respondents to prioritize (most polls make the mistake of asking about budget issues in isolation [e.g., "Do you want more education spending?" "Do you want lower taxes?"] without bringing to mind the trade-offs that such issues require). The results? Majorities of Americans want defense spending to take a big hit, and income taxes to rise for those making over $100,000 per year. Unfortunately, the current debate is focusing more on small and painful solutions (things like halving a program to help with heating bills for the poor, and eliminating AmeriCorps)...

First of all, Kye (and Krugman) are completely correct that rising health care costs is the major driver of our nation's long-term fiscal problems (to maintain our current provision of services by the government, or anything approaching that level, the total size of government as a share of GDP would have dramatically increase to levels that seem dangerous to our economy's continued robust growth potential. Since this seems unlikely, than you have conflicts in the budget between spending money on health care vs. Social Security vs. defense vs. Social safety net spending).

The second most important driver of our long-term fiscal problem is the aging of our population which exacerbates rising health care costs (since so many elderly are in Medicare and Medicaid), increases Social Security costs while reducing dedicated revenue (which is why Social Security in the long-run under current law is unsustainable), and potentially limits future economic growth and the resulting revenue generation (more elderly means less-working age adults as a % of the population- which is an economic drag).

Also, past deficits are a drag on our long-term fiscal situation. Thank-you President Bush's deficit-financed military interventions, tax cuts, and expansion of Medicare D; combined with large deficits from Obama's first few years [which Kye is right to point our largely originates from an automatic decline in revenues, though also what most economists argue is a necessary expansion in government spending to compensate for losses in aggregate demand due to the severity of the financial-sector heavy Great Recession].These past deficits are a problem because the borrowing the federal government did in the past eventually has to get paid off with interest. Those interest and balance payments that we have to do now (and increasingly in the future) are essentially us paying for past government finance imbalances.

Two other factors are essential to explaining our country's long-term fiscal problems. 1) Robust, sustainable economic growth (something we have not seen since the 1990's) is essential to dealing with our deficit and debt problems. The federal government has rarely run surpluses- but our country still dramatically reduced our debt-to-GDP ratio (the most important measure of a country's government finance problems serving as a drag on the economy, and a measure of risk of economic implosion during financial market crises). Our government reduced the debt/GDP ratio by keeping annual government deficits below growth rates (aka generally below 3%). By doing this, the debt grows less each year (in absolute dollar terms) than the size of the economy (GDP). Since the numerator is growing smaller than the denominator, the overall fraction (Debt-to-GDP) approaches zero (think back to Calculus, though it's not really that complex a problem, I just know this principle comes up a lot in Calculus). The U.S. reduced a massive post-WWII debt (higher than current levels) over decades to perfectly sustainable levels, even though they only ran surpluses in a few years- they just kept deficits small each year.

2) If the Bush tax cuts for all Americans are allowed to continue (not allowed to expire), than our revenue system will struggle to generate enough revenue to support old standard levels of government spending as a % of GDP (about 20.6% I think). There is now way such a weak tax system could generate the amount of revenues needed to fund the GDP government spending ratios most reasonable policy analysts predict necessary (23% of GDP) in the mid-term (as we slowly get health care costs under control).

Ok, so hopefully that was a decent and accurate explanation of the United States' long-term fiscal problems, which in summary mainly deal with health care costs. Krugman is correct that reining them in is essential to tackling our problems- if health care costs aren’t controlled, we would either have to cut the entire defense budget or the entire safety net (or cut both by about half) in just a few decades (this is a rough approximation based off CBO projections).

So if health care is the problem, why don’t we address that? Obviously the politics of health care issues are tricky since the nation’s tired of that. Even the policy options are tricky- the Affordable Care Act (health care reform/ObamaCare) includes every major cost-control idea generated in the past few decades in some form or another. Many are being test-piloted in regional experiments where we can see what works and what is necessary before we bring the reforms up-to-scale (aka nationwide). The only remaining policy options pretty much are either the distinctly conservative or liberal options (privatization, market-reforms vs. public option/single-payer/nationalization).

While there are theoretical (and some micro-level) research supporting and attacking the conservative full-market reforms, there is no comparable system in the world that we can look to for an idea of what to expect. While there are other private-ish systems, they all contain massive amounts of government regulation that make up for the lack of direct, government intervention we have in Medicare and Medicaid. Also, there is a question of whether we can transition from our hybrid-system to this private model without either dramatically increasing the number of uninsured in the short-run or dramatically increasing the amount of government subsidies for people to get private insurance in the short-run as market reforms go into effect and before they start generating savings (and that’s assuming the privatization works in the long-run, which is questionable due to the unique nature that is the good: health/medical care).

The liberal-options on the other hand are undeniably better as an aggregate than our current hybrid-system, and we see a vast variety of options and liberal alternatives as we look across our developed-nation peers who provide universal care for a lower cost while providing equivalent outcomes to our own system.

So our best policy option if we wanted to cut costs would appear to be the liberal approach- what are the political odds of Republicans proposing that?

So what options does that leave Republicans who need to satisfy their base by making large cuts quickly?

(I’m not sure if I want to fully answer this question/continue debating this before the debate on Thursday is over. I don’t want to influence the idea generation then by excessively espousing my views on the issue, which obviously could be wrong or biased by my own internal preferences and thought processes. We'll see...)